7.09.2008

A Lean Strategy: Why Mergers and Acquisitions Succeed

Applying lean approaches during a merger or acquisition can not only make it go more smoothly, but can also make the price look better.

Those were some of the insights offered at the recent San Diego regional conference of the
Association for Manufacturing Excellence by two speakers from DJO, a $1 billion (revenue) manufacturer of orthopedic and other medical devices.

Luke Faulstick, COO, and Jerry Wright, VP for lean and enterprise excellence, described how DJO has benefited from a lean strategy in its acquisitions of several companies in recent years. (“There is no such thing as a merger. They’re all acquisitions,” Wright said.)

DJO has long been on a lean journey. The Shingo Prize and the Baldrige Award are month the honors won by some of its facilities.

Like any other acquisition, they said, a lean acquisition begins with a deal developed confidentially in board rooms and with Wall Street firms. The difference is that the initial agreement also includes knowledge of the acquired company’s “state of lean.”

Once a letter of agreement is signed and the deal announced, due diligence begins. But in a lean deal, at the same time as due diligence, integration begins (at risk). The price is confirmed.

If the deal is ultimately consummated, integration continues, but is already accelerated ahead of traditional M&A.

One significant point, the speakers said, is that lean enables an acquiring company to better assess the value of inventory that can be turned into cash, traditional overstaffed operations, and competitive advantage possibilities through improvements.

For example, they said, in a typical lean valuation:
Inventory is not calculated at book value, but at 50 percent as is and 50 percent that can become cash
Direct labor required is assumed to be 70 percent of current staffing (with the same assumption for non-overlap indirect labor)
Material cost is assumed to be 90 to 95 percent of current costs

Faulstick and Wright also spent considerable time discussing the importance of addressing management and cultural issues to achieve a successful integration. “If you don’t think about those, they can actually make the merger blow up,” Wright said.

Have you ever been involved in an acquisition where lean strategies were applied? (Or where they should have been?) What is your experience?

3 comments:

Adam Zak said...

Another way in which a very simple LEAN concept can be applied to make a merger successful is the standard checklist.

I've been doing a bit of research on the use of checklists across industries (think pilots in the cockpit prior to take-off, surgeons preparing for a patient surgery, etc.), and I ran across an article in Fast Company magazine from March, 2008, which mentioned Cisco's use of checklists during acqisitions.

Authors Dan and Chip Heath say: "Cisco Systems, renowned for its savvy in buying and absorbing complementary companies, uses a checklist to analyze potential acquisitions. Will the company's key engineers be willing to relocate? Will it be able to sell additional services to its customer base? What's the plan for migrating customer support?"

I also personally work with a number of private equity firms who have found that key-area checklists, often "cascading" lists which resemble a Hoshin plan in some ways, are critical to buy or no-buy decisions.

The Heath brothers point out in their article that most of us can probably remember about 80% of what we'd otherwise include in the checklist, but what if we forget about a critical factor which happens to fall into the other 20%?

As they write, "...it would be inadvisable to rememer the other 20% after the close of a $100 million acquisition. (Whoops, the hotshot engineers won't leave the snow in Boulder.)"

Yes, it would be inadvisable.

Adam Zak

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addysmith92 said...

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